Twilight of the Euro

Eurodämmerung

MONEY is always and everywhere a political phenomenon, nowhere more
clearly than Germany.

Hitler's first coup attempt, the Munich Beer Hall putsch, came during social
chaos of late-1923's Weimar inflation. His 1,000-year Reich (lasting barely
a decade) then brought fresh monetary nightmares to life, not least the Lagergeld
coupons issued to concentration camp slaves. Amid fresh hyper-inflationary
fears and the cigarette-barter economy of mid-1948, the Cold War got started
when Ludwig Erhard, then Director of Economics for the occupied zones, launched
the Deutsche Mark one Sunday, both wrong-footing the Allies (whose officials,
naturally, were enjoying a day at home) and so enraging the Soviets that they
blockaded West Berlin. Even today, senior Bundestag policymakers argue in public
over how far European monetary union was a
French pre-condition for accepting East and West German reunification in
1989.

"I cannot believe that will happen. It is inconceivable," says Eichengreen.
But that just shows a lack of imagination. So do a
host of Eurozone officials. German households, in contrast, know their
history.

The German public has long thought the Euro project might unravel, still holding
onto some 13
billion physical Deutsche Marks today - equal to nearly 1% of the 16-nation
Eurozone's entire notes and coins now in circulation - despite being able to
exchange them at any time in the last decade for full Euro-value.

More telling again, gold
investment demand - that outright rejection of central-bank policy -
continues at near-record levels, as this
chart from Wolfgang Wrzesniok-Rossbach at refining group Heraeus shows.

As you can see, Germany (in green) was and remains the developed-world's No.1
gold bar market. (The Swiss flag also indicates how a large but unknowable
chunk of Swiss demand for gold bars in fact comes from Germany, where savers
want to hold the metal outside the Eurozone - as they can, for instance, at
very low cost using BullionVault.de.)

Nor does the United States hold the monopoly on those "swivel-eyed
gold bugs" of popular journalistic imagination, either. Citing the discussion
boards at HartGeld.com, finance
daily FAZ says that German conspiracy theories are getting "chronically
overheated online"...primarily because they keep predicting "Apocalypse" for
the Euro. But this week's new Euro-price records in gold point to something,
and something awful we guess, for this most fiat of fiat currencies.

At a minimum, the trebling of gold prices from Germany's long stable valuation
around €10,000 per kilo (or rather, DM20,000) throws the Euro's "stability
pact" into sharp relief yet again. And you don't need to be Jude
Wanniski or Alan
Greenspan to wonder if the price of gold - used as money for 5,000 years
straight - might hold a high information-content regarding the value of what
Europeans have come to call money in just the last decade.

Right from the get-go, in fact, the "ghost
of the Mark" (as Nobel-winning economist and 'father of the Euro' himself
Robert Mundell called it) saw the Euro's strict rules - learnt and applied
during 50 years of Teutonic discipline - over-run at every turn.

The European Central Bank's own target
for money-supply growth was first down-graded to a "reference value" and
then ignored outright. Set at 4.5% per year, it hit well over 12% at the
height of the banking bubble in 2006-7;

Luxembourg excepted, all member states have also breached the Eurozone's government
deficit and debt ceilings too - Germany included - leading the governing
council in Brussels to impose "special measures" that they've then similarly
failed to meet;

Monetary systems can and do break down, and the ties of cross-border trade
cannot guarantee a currency pact which 15 out of its 16 members have breached.
No two countries with a McDonald's franchise ever went to war with each other
until they did in the Balkans in 1991, and as the last of the Euro's tattered
rules are torn up, why should the legal "impossibility" of secession alone
be observed?

The likely chaos to follow, of course, is focusing the technocrats' minds
as never before. Barry Eichengreen's own
warning - of huge and damaging transfer costs, plus a capital flight from
the weaker states forcing any new German currency upwards and thus hurting
its exports - makes a compelling case for giving the Euro what it's always
lacked:

A single sovereign government to back the single currency.

Hell, Aristotle and Plato knew
that money is ordained by the sovereign, as did monetary historian Alexander
Del Mar 24 centuries later. But the rush to federalize now underway - the "last
battle" lampooned by HartGeld.com on Thursday with a photo of Hitler reviewing
his pre-teenage troops in Berlin, May 1945...and challenged by such "swivel-eyed" skeptics
as the UK's Nigel Farage (he
did use to be a London metals trader, after all!) - seeks to create a sovereign
in the image of its money, not stamp the latter with the former. Its aim is
a super-state willing, eager and able to print Europe out of its debts.

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the
secure, low-cost gold and silver exchange for private investors. It enables
you to buy and sell professional-grade bullion at live prices online, storing
your physical property in market-accredited, non-bank vaults in London, New
York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
silver (US$129m) as their outright property. There is no minimum investment
and users can deal as little as one gram at a time. Each user's unique holding
is proven, each day, by the public reconciliation of client property with formal
bullion-market bar lists.

BullionVault is a
full member of professional trade body the London Bullion Market Association
(LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious
Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development
body the World Gold Council (www.gold.org)
joined with the internet and technology fund Augmentum Capital, which is backed
by the London listed Rothschild Investment Trust (RIT Capital Partners), in
making an $18.8 million (£12.5m) investment in the business.

Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.